A few years back the candle maker I was representing in my business retired and I was looking for a new company to replace her. Several different candle companies contacted me, so the prospects looked good. But when I asked each of these candle makers to send me a wholesale/retail price sheet, I was shocked by what I received.
One gal made beautiful candles, I would like to have repped for her, but her wholesale price was 80% of her retail price! And this was not the only example of poor price structure. Eventually, I did finally find a producer whose pricing structure would work, but it took a long time …
As a general rule of thumb, your wholesale price should be 50% of your retail price. If it is more, you will have a difficult time selling your products wholesale. Often, it will take some work to make sure there are adequate margins for you both and the gift retailer.
Here is a formula to use when determining pricing for your products.
First step is determining your cost per unit. Costs include the following:
- Ingredients or raw materials
- Processing or assembly of raw materials
- Packaging and labeling
- Shipping of raw materials to your place of business
Second step is to determine the retail or selling price of your item to the consumer. Using a competitor’s selling price is a starting point to ensure you are in the same price range. From the selling price, you work backwards to arrive at the wholesale price you should charge.
From the retail or selling price, subtract the retail and distributor or sales rep margins. Most retailers in the gourmet foods industry use a margin of 40%, whereas gift retailers use a 50% margin.Distributor margins are generally 25-35%, and broker or sales rep commissions are general 15%. Even if you currently do not use distributors, brokers or sales reps, these margins should be included in your pricing. As you grown and add these services, you want to have your pricing in place.
As a manufacturer, you should aim to retain a 40% gross margin. This gross margin must be large enough to cover overhead, administrative costs and marketing expenses.
If the retail or selling price is $5.00, total manufacturing costs per unit are $1.40 and the manufacturer pays shipping costs of 5 cents per unit, you would sell your product to the distributor for $2.20:
Retail or Selling Price$5.00
Less Retail Margin of 40%X60%
Equals Retail Cost=$3.00
Less Distributor’s Margin of 25%X75%
Equals Distributor’s Cost=$2.25
Subtract Shipping Cost Paid by Producer-.05
Equals Producer’s Price=$2.20
Less Producer’s Margin of 40%X60%
In this example, actual costs are $1.40 making the true profit margin is 36% rather than 40%, but hopefully, you understand the concept.